Salary sacrificing can seem like one of those headache-inducing tax terms, but some people who do take advantage could be saving more than $5,000 each year.
Perhaps because it's a difficult concept to get your head around, as plenty of people who could be salary packaging without much effort are missing out.
It's the job of Mike Daly, Customer Education Specialist at Smart Group, to help Aussies understand how they might be able to benefit from salary sacrificing, and he thinks the participation rate is "really low", particularly in the not for profit sector.
"Not for profit organisations... usually will have about 60 to 70% of their staff actively participating," he told the Savings Tip Jar podcast.
"[If] you understand the benefits you're like, why isn't everybody doing this? It can be a huge benefit, but that's certainly why my job is pretty popular these days."
Mr Daly says not for profit employees might be able to salary sacrifice up to $15,900 per year, which at a marginal tax rate of 30% could be worth more than $5,000 a year in tax savings.
Health sector employees could sacrifice up to $9,010 each year (more than $2,900 in tax bill savings) while other employees can benefit from options like novated leases.
What is salary sacrificing?
Salary packaging or sacrificing means reducing your take home pay in exchange for equivalent benefits paid for by your employer, deducting that amount from your taxable salary and therefore reducing your tax bill.
Benefits can range from mortgage or car repayments to living expenses like school fees or even investments.
Your employer might need to pay fringe benefits tax on the value of the benefit they provide to you, which you may be asked to contribute to, but if done correctly you should still end up better off than you would have just paying tax on your entire salary.
Why more people aren't doing it
For people who work for non-profits or in the healthcare sector, salary sacrificing might sound like a no-brainer, leaving thousands of extra dollars in your pocket each year.
Mr Daly explained these benefits are a way to encourage people to work for non-profits which might not be able to compete with the private sector on wages.
"If they can't pay people the same as what they might be able to get in the corporate world then one way of increasing their take home pay is to allow them to pay less of what they earn as tax," he told the podcast.
He thinks the reason many people don't take advantage of the potentially "incredible" benefits is a combination of skepticism and a general lack of understanding.
"There are so many scams out there that people are pretty suspicious, and [salary sacrificing] honestly comes across as seeming like it can be too good to be true," Mr Daly said.
"When we're telling you that you can pay less of the money you earned to the tax man so you get to keep more of it for yourself, [that] certainly is what it can look like.
"The other side of it is just people not being aware of what they can salary package so it's certainly something we encourage people to look into."
Benefits of novated leases
For employees who don't work for non profits, novated leases are one of the most popular salary sacrificing options.
A novated lease is a salary sacrifice arrangement where your employer makes your car lease repayments for you, deducting the amount from your pre-tax salary.
This reduces your taxable income, although a vehicle is considered to be a 'fringe benefit' so FBT still may apply, the cost of which your employer may pass on partially or in full to you.
These tax benefits are the main advantage of a novated lease, with some 'fully maintained' novated lease agreements also including vehicle expenses like fuel and registration in the pre-tax salary deductions.
Mr Daly called novated leasing a "fantastic benefit" and highlighted the additional benefit to novated lease agreements when the vehicle in question is electric.
"If it's a petrol or diesel car... some of the money is going to be sent across out of your pre-tax pay and some would be sent as an after tax payment," he told the podcast.
"Because it's your own personal private use vehicle, you can't use all pre-tax pay, that's unless it's an electric vehicle.
"The government introduced some new legislation a couple of years ago which basically means if you salary package an electric car, it's now 100% pre-tax."
Picture by Kelly Sikkema on Unsplash
Ready, Set, Buy!
Learn everything you need to know about buying property – from choosing the right property and home loan, to the purchasing process, tips to save money and more!
With bonus Q&A sheet and Crossword!
Harry O'Sullivan
William Jolly
